Top payment companies Visa and Mastercard both made major fintech acquisitions in 2020. These fintech acquisitions are a sign that traditional financial institutions are embracing the need for technology-focused payment solutions.
Visa’s Acquisition of Plaid
Visa announced it is acquiring Plaid, a network that connects financial accounts across platforms, for total purchase consideration of $5.3 billion in January 2020. Plaid facilitates the secure sharing of financial information with thousands of applications including Acorns, Betterment, Chime, Transferwise and Venmo.
The Plaid acquisition strategically positions Visa for the future. As co-founder and CEO Zach Perret describes it, “Visa is trusted by billions of consumers, businesses and financial institutions as a key part of the financial ecosystem, and together Visa and Plaid can support the rapid growth of digital financial services.”
Two years ago, San Francisco-based Plaid acquired the startup Quovo in order to expand its platform beyond just banking to other financial services and investment accounts. In Plaid’s $250M Series C round in 2019, which valued the startup at $2.65 billion, Visa and Mastercard quietly invested alongside a consortium of other investors. Its valuation has since grown rapidly and Visa jumped at the opportunity to acquire it in January.
Plaid enables data exchange with an application programming interface (API) that links people’s bank accounts with fintech apps. Currently, Plaid has integrated with over 15,000 banks and 4,000 fintech apps. With the acquisition, Visa anticipates benefiting from enhanced access to customer’s bank account data that will enable it create a platform that is competitive with the likes of Venmo and Zelle. Additionally, the move could strengthen Visa’s capabilities in the global wire transfer space.
Mastercard’s Acquisition of Finicity
Visa’s long-standing rival Mastercard has followed the trend of making acquisitions in the fintech infrastructure space. In June 2020, Mastercard revealed its plans to acquire the financial data aggregation startup Finicity for $825 million. Mastercard is paying over 50 times revenue for the Salt Lake City-based startup. Intuit also expressed interest in acquiring Finicity after the startup announced plans to sell itself in early 2020. The Finicity deal marks another major fintech acquisition for Mastercard. In 2019, Mastercard acquired Scandinavian payments platform Nets for $3.2 billion. That same year Mastercard bought Transactis, an electronic billing and payments solution provider.
With the deal expected to close toward the end of 2020, Finicity is planning to have its approximately 500 employees join Mastercard. The startup plans to continue operating in Salt Lake City and Mumbai.
Finicity already has partnerships with thousands of financial institutions and fintech companies. Many of the largest banks are customers including JPMorgan Chase, Wells Fargo, Capital One and Fidelity Investments. By joining forces with Finicity, Mastercard hopes to bolster its open banking services. Open banking facilitates greater financial transparency options for account holders through the use of application programming interfaces (APIs).
Rapid Fintech Adoption Drives Fintech Acquisitions by Traditional Companies
Investments in fintech startups have increasingly become a necessity for incumbent payment processing companies like Visa and Mastercard. Visa, founded in 1958, and Mastercard, founded in 1967, have had to stay abreast of novel technologies in order to maintain their foothold. A number of modern payment companies such as PayPal, which was founded in 1998, have been quite successful at breaking into the payments space. In response to the existential threat posed by high-growth payment startups, Visa and Mastercard have ramped up research and development efforts and become more acquisitive.
Aside from numerous fintech acquisitions in recent years, Visa and Mastercard also have tried to stay in the loop through affiliations with innovative players. Both payment giants initially joined the Libra Association alongside a host of other high-profile companies and venture capital firms such Andreessen Horowitz, Union Square Ventures, Uber, Spotify, Stripe and PayPal. The Libra Association is the membership organization that is supposed to govern the Libra Project, Facebook’s ambitious effort to develop a cryptocurrency backed by traditional fiat. Although both Visa and Mastercard later dropped out due to regulatory concerns, both companies have been on the lookout for strategic partnerships and other opportunities to display their technological prowess.
One looming risk for fintech companies is figuring out how to navigate complex and often unclear regulatory regimes at the global, federal and state level. While fintech innovation has developed at an exponential pace, laws and regulations to govern the industry have lagged far behind. This has left fintech businesses in a precarious situation. In the case of Plaid, they are facing a class action lawsuit brought by Venmo users in California federal court. The lawsuit alleges that Plaid uses deceptive methods to dupe consumers into providing bank login information to the startup without their consent. Visa is separately being investigated by the U.K. Competition and Markets Authority to determine whether the Plaid acquisition deal will result in “a substantial lessening of competition” under the U.K.’s Enterprise Act 2002.
The societal changes ushered in by COVID-19 have undoubtedly spotlighted the need for seamless fintech solutions. In order to meet the demands of existing and prospective customers, it will be critical for Visa and Mastercard to continue embracing technology that increases connectivity of user accounts across applications. This likely means that legacy companies will continue pursuing strategic acquisitions of promising fintech startups for the foreseeable future in order to remain well-positioned.